Documents filed this week in the Chrysler bankruptcy related to eliminating nearly 800 of its car dealer franchises helps explain, in part, the move by U.S automakers to cut dealerships.

John Green - The Hutchinson News - jgreen@hutchnews.com

Saturday

May 16, 2009 at 12:01 AMMay 16, 2009 at 6:00 PM

Kansas car dealers, however, contend the actions by Chrysler and GM to force dealership closures won't do anything to save the carmakers, but instead will only serve to hurt both communities and manufacturers.

The problem, Chrysler officials explain, is that there are too many dealers for the system to be profitable, particularly against foreign competition, which operates differently. The intent is to strengthen the surviving ones by concentrating sales at fewer dealerships.

GM shared similar sentiments Friday after sending letters announcing it would not renew franchise contracts to about 1,100 of its dealerships across the country, including two in Lyons.

The problem dates back to how the dealership system developed and evolved - or failed to - over the years. As suburbs grew and interstates were built, longstanding dealerships "no longer were in the best or growing locations."

Because the average domestic dealership sells fewer cars, it has smaller profit margins and can't afford to invest as much in showrooms and customer service.

That, experts say, leaves consumers with a bad impression about American brands.

That's all resulted, officials state, in only a quarter of Chrysler's 3,200 dealerships accounting for more than half of its car sales, with about half accounting for 90 percent.

Or, in reverse, nearly half of dealerships account for only 10 percent of sales.

In GM's case, targeted dealers make up about 20 percent of the company's total but represent only 7 percent of its sales.

Yet those dealerships that sit with full lots still have to deal with ongoing costs, making them comparatively even more expensive and inefficient.

Costs which manufacturers bear include providing required training for warranty services and showroom personnel, helping with financing for both dealers and customers, as well as auditing and other expenses generally related to overseeing franchise operations, whether profitable or not.

Plus, Chrysler's bankruptcy filing points out, there are numerous dealerships that carry only one or two of each the carmakers brands, while others are "full line dealers," carrying all brands. Having so many "partial line" dealerships "requires the production of overlapping models under different brands, which further increases unnecessary costs and introduces substantial inefficiencies in the distribution system."

In contrast, foreign auto dealers that more recently came into the U.S. market built fewer showrooms at better locations and in growing markets, with more car models under a single roof.

Those higher sales per dealership, the carmakers say, result in more sales, better profitability and "greater resources for marketing, reinvesting in the business, improving facilities and enhancing the consumer experience and customer service."

Substantially higher profits also enable those competitors to hire away more experienced and qualified personnel from the domestic dealer networks.

"In sum, the smaller, more efficient, more profitable dealer network for the transplant OEMs (original equipment manufacturers) has become a competitive disadvantage for the Domestic Dealer Network."

In the 1980s, GM, Chrysler and Ford accounted for more than 75 percent of U.S. sales, but that dropped to 48 percent last year. GM alone held nearly 51 percent of the market in 1962, but only 22 percent last year.

Thursday's filing notes Chrysler sold about 1 million new vehicles in 2008 through 3,298 dealers, for an average of about 303 per dealer.

Last year, Toyota sold 1.6 million new vehicles in the U.S. through 1,242 dealers, for an average 1,292 per dealer. Honda averaged 1,030 vehicles per dealer.

"Thus, the throughput for Toyota and Honda dealers is approximately 415 percent higher than the average throughput of the Debtors' dealers," the filing stated.

Chrysler has been working to consolidate its dealerships and put its best dealers in the best locations since 2001, when it had some 4,320 franchise dealerships. But the consolidation, it argues, is not happening fast enough. Thus its plan to eliminate 789 dealership contracts, which were named on Thursday.

Car dealers, however, have a different take.

"From my perspective as a dealer, we don't cost them anything," said Rick Schoepf, president of Shep Chevrolet in Haven. "We pay for everything we get from GM, our tools, our signs, our training. This doesn't do anything to help them. I feel, in fact, it's a detriment because they're chopping their sales organization in half. They're losing the opportunity to retail units to consumers. What they need at this point is revenue, so it's counterproductive."

Douglas Wright, with Hillsboro's Wright Motors - one of the franchises Chrysler announced it was closing - agreed with Schoepf.

"They're on the wrong kick," Wright said. "Dealers are the customers of manufactures. Unless we buy cars from them, they have no place to sell them. If they want to go out and cut dealers, they're cutting off their own right arm. And a dealer doesn't cost them anything. We pay for everything, from advertising, to tools and training. It's all paid by the dealer."

Dealers, noted Don McNeely, president of the Kansas Automobile Dealers Association, in an e-mail, pay for their vehicle inventory "before the vehicle ever leaves the factory."

They also pay, McNeely said: for parts before receiving them; all their employees' costs, including wages, benefits, taxes and training; for their own real estate costs, including land, buildings and insurance; and all their equipment costs.

Forcing out dealerships, McNeely said, "will only serve to hurt the hard-working employees of those dealerships and their families, the numerous communities that rely on the taxes generated by those dealerships, the related businesses that sell to those dealerships and the consumers that are served by the competition and convenience of the dealerships and the numerous charitable organizations that benefit from dealers' support."

"When a dealership closes," he said, "the loss to the community is real and immediate."

The Associated Press contributed to this report

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.